2011
Mid Year Letter
May 9, 2010
Dear Valued Clients and Friends,
In 2011 the stock market has overcome several downturns to end up 9.1% (Dow Jones Avg.) through April 30th. U. S. Treasury Bond yields are about where they were at the beginning of the year at 3.2% for the 10 year maturity. Stock markets have been buoyed by strong corporate earnings and a perception that the economy is continuing to improve, albeit slowly and unevenly. Bond yields continue to be held artificially low by the actions of the Federal Reserve. However, we will likely see a rise in yields as the Fed completes a second round of quantitative easing ("QE2") in June.
In the face of this backdrop, many market observers viewed the largest threat to the economy as inflation. Indeed, we have often said that statistically the most likely mid to long-term economic scenario is always economic growth coupled with some level of inflation. With individuals, businesses and industries around the globe predisposed to growth what else could the most likely long-term result be? Most commodity prices reached new highs in the last month due to mounting inflation concerns.
And then came May, with reports showing slowing productivity, rising jobless claims and declining consumer confidence. It's enough to depress any inflation hawk enough to at least take a quick perch on the first branch available. And perch they did, as the Standard and Poor's GSCI index of 24 commodities sank 6.5% on May 5th and was down almost 10% over 4 days. Which brings us to what we really want to talk about in this letter - it is really hard to predict where the economy is going. This is why economists make predictions so frequently. It is also why we don't try to make predictions at all.
Investors that placed a significant portion of their portfolios into investments directly betting on rising commodity prices did not have much reason to celebrate Cinco de Mayo after watching that portion of their portfolio decline 10% over 4 trading days. Before this letter reaches you commodity prices may well increase 10% over the next 4 days - but that will simply reinforce the point for us as we consider "chasing the economic forecast" to be speculation. We are not speculators; we are long-term investors. We expect to protect clients from inflation - in the long run - by a rising stream of dividend income and by owning the shares of high quality companies that grow and adjust through all types of economic weather. We are certain that you are not looking to experience the increased volatility associated with more speculative investing.
This mid-year letter also marks the annual requirement by the Securities and Exchange Commission that we offer to send you Part 2 of our SEC Form ADV. This document used to be called our "Disclosure Statement" but has been re-titled in a less regulatory way as our "Firm Brochure." As you may recall, this is a brief description of our business, investment philosophy, and polices. We are happy to mail you a copy of our Firm Brochure but it is most easily available on our website at www.stewartandpatten.com. You will also find Part 1 of our ADV and other disclosures on our website and past commentary similar to this letter.
Also, the Securities and Exchange Commission requires the annual mailing of our Privacy Policy under "Regulation S-P." Regulation S-P requires us to inform our clients of our privacy policies on an annual basis. Accordingly, please find attached Stewart and Patten's Privacy Policy. As we have stated before, this policy in many respects is simply a formal presentation of the way we have practiced business for many years. We value our relationship with you, and we know that respect for your privacy is the very foundation of that relationship. Since our company was founded in 1942, we have built a reputation based on trust. Advances in technology have made vigilance over safeguarding private information all the more important.
As always, please do not hesitate to call us at 415-421-4932, with questions, concerns, or comments.
STEWART AND PATTEN CO., LLC
